Canadian real estate markets have become such a large bubble, even a crash can’t fix prices. That’s what the Globe’s Rob Carrick argued earlier this week. The personal finance expert says it’s now too late for young adults in Toronto and Vancouver. Policy failures made markets so inefficient over the past few years, ownership is now an unrealistic dream for them. As a result, the trend of flight to small towns might be a more permanent shift, even after the pandemic.
Crunching the numbers, Rob might be right. Even an earth shattering 30% crash can’t make these cities affordable for most. Over just a few years, these cities are now unrealistic options if prices rise, stay the same, or even crash. Here’s the numbers on how unrealistic the market has become for young adults.
About Today’s Numbers
Just a quick primer on the assumptions and numbers used. We used local board prices for the typical home, a.k.a. benchmark. We’re then going to look at how long it takes to save a down payment, as well as the income to cover a mortgage. If you want a detached home, it would be easier to build a time machine than save the down payment in either Toronto or Vancouver.
For the income used in these calculations, we used the median income for people aged 25 to 35 years old. We assume a dual income household, saving 10% of their gross income. Incomes are also assumed to have grown in real terms, which isn’t the case for Toronto. Yes, I’m being generous by using lower home prices, and higher incomes. You know me, ever the optimist.
For the mortgage nerds, there’s also a few assumptions needed that are generous. The amortization period used is 25 years, with monthly payments. We’re also assuming the payment is a max of 30% of your income, but it’s only the mortgage cost. It excludes taxes, maintenance, and insurance — which need to be less than 5% of the income, or incomes need to be higher.
The mortgage rate is also assumed to be 2%, which is what you’d find today, but far from normal. For mortgages to stay this low, Canada would perpetually need to be in recession. If that happens, homeownership is probably one of the smaller issues.
One last point, we’re looking at the Greater Regions for Vancouver and Toronto. If you want to live in the city, you’ll likely need to pay much more. We’ll also look at the next real estate market, where young people are currently fleeing. These markets are already seeing massive price growth though.
It Would Take Up To 26 Years To Save A Down Payment Today
First, let’s start with down payments in Gangster’s paradise — Greater Vancouver. At February’s prices, the GVA would require 307 months of savings (26 years) to save the minimum. If you plan to flee to Fraser Valley, you’re looking at 128 months of savings (11 years). For those not from Vancouver, Fraser Valley is the adjacent real estate board to the GVA. It’s basically a suburb of a suburb.
Greater Toronto real estate seems affordable in contrast, but really isn’t. The typical down payment requires 135 months of saving (11 years) for the minimum. Fleeing to Hamilton cuts it down to 105 months of savings (9 years) for the minimum. You’re going to have to stop crying, because we’ve got a lot of numbers to go through.
Note to American readers: Canadians say Toronto is like-NYC, but it’s a generous comparison. For context, the city’s density is similar to Philly. The Greater region’s GDP is about the size of Detroit. Greater NYC’s GDP is similar in size to all of Canada. It’s not quite the same, and you’re more likely to be able to buy a place you can afford in NYC than Toronto, on the same income.
How Long Does It Take To Save A Down Payment If Prices Fall 10%?
The real estate industry and government find anything more than a 10% correction to be absurd. That’s less than a year of prices rolling back. GVA real estate prices falling 10% drops the minimum down payment to 136 months of savings (11 years). In Fraser Valley, it’s about 108 months of savings (9 years).
You might have noticed Greater Vancouver’s number dropped significantly. That’s because below $1,000,000, the down payment threshold drops significantly. Allowing smaller down payment on higher prices sounds like the solution then, right? Unfortunately that’s a credit expansion, and is most likely to facilitate higher prices as a result.
In Greater Toronto, it still takes at least a decade to save. A 10% drop in a typical home price would lead to needing 114 months of savings (10 years). In Hamilton it would take about 87 months of savings (7 years). Getting better to live an hour (without traffic) away from Toronto.
How Long Does It Take To Save A Down Payment If Prices Fall 30%?
Greater Vancouver real estate prices start to look reasonable with a 30% drop. Only by contrast though. A typical home would take 90 months of savings (8 years) to save the minimum down payment. In Fraser Valley it would take about 68 months of savings (6 years). Keep in mind, this is still just for a typical home. A 30% price drop for detached homes would still need 320 months of savings (26 years) for the minimum down payment.
Months For A Downpayment On Canadian Real EstateThe number of months it would take a dual income household, aged 25 to 35, to save for a downpayment. Source: CREA, Better Dwelling.
Greater Toronto real estate prices at 30% also look somewhat affordable. The GTA would require 74 months of savings (6 years) for the minimum down payment. In Hamilton it’s a much more reasonable 52 month of savings (4 years). A detached Greater Toronto home would require 99 months of savings (8 years) for the minimum down.
If prices crash this much, the down payment time improves — but there’s other things to consider. The number of months assumes wages rise in line with real estate prices. Canada’s economy is so heavily concentrated in real estate though, it would be tough to see wages rise near-term.
When New York City saw real prices falling ~26 from 2006 to 2012, it took a lot of the economy with it. By 2017, the population had peaked, after prices only half recovered. They’re finally above the 2006 peak, but it was a long time. Prices didn’t move for almost 15 years, and they’re now rising against a falling population. That usually doesn’t last super long.
Household Incomes Still Need To Be At Least $128,100 To Carry The Mortgage
Oh, crap. Did I forget to mention the mortgage payments aren’t possible for people making those wages? In Vancouver, you currently need to earn at least $147,600 to make the payments on a typical home in February 2020. Over in Fraser Valley, you can get away with $143,700 per year. That’s 44% and 40% higher than the current median household income, respectively.
Greater Toronto real estate also requires much bigger salaries to carry the mortgages. The payments on a typical GTA home needs a minimum salary of $148,570. In Hamilton, it’s estimated at $128,100 at minimum. The minimum income is 45% and 25% higher than the current estimated household income, respectively.
Incomes Still Need To Rise If Prices Crash 30%
Greater Vancouver real estate payments still can’t be covered by a median salary, even with a 30% crash. Covering the mortgage payments on a typical GVA home works out to a $118,200 minimum income. If you flee to the burbs in Fraser Valley, that income is a $103,100 household minimum. The minimum GVA income is 15% higher, and Fraser Valley is 1% than the current median income. If things crash and stay at that level, Fraser Valley is affordable. So congrats, BoC. You’d nail one major employment region.
Canadian Minimum Household IncomeThe minimum income required to carry a mortgage on a typical home, at current levels, compared to a 30% real estate price drop. Source: CREA, Better Dwelling.
Greater Toronto real estate would be almost affordable at this level to carry. Households require $106,500 of household income to cover the minimum payments. In Hamilton, the current minimum income would cover the payments. Even though mortgage payments would be affordable, you have to consider employment.
Real estate prices absolutely cratering makes prices affordable, but there’s the economy. For the above wages to work, they need to move in line with house prices. However, a crash like that would see a weak employment market, making it tricky to not see your own wages fall.
Canada’s addiction to real estate also led to a buildup of risk never before seen. The country is almost twice as dependent on real estate as the US was before the Great Recession. If its two major markets suffered a major drop, the adjustment of capital allocation is likely to take longer. The environment would also force entrepreneurs to seek out more attractive regions. With those entrepreneurs, go the jobs.
Preserving real estate prices is also likely to have a similar effect at this point. Let’s assume the best outcome, where prices move smoothly with income from here. In the GVA, today’s 25 year old couple would be 51 by the time they have a down payment. If they were ambitious and wanted a teardown detached, they would be 63 by the time they saved a down payment. Not exactly a reality most people would enjoy. In fact, it could be a worse scenario than the one many of their parents immigrated to avoid.
Usually people are smart enough to figure out there’s better opportunities for them. That’s why the flight to smaller cities and small towns is likely to persist for much longer. Canada saved banks from systemic risk during the Great Recession, by transferring systemic risk to its major cities.
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